Dhanlaxmi Bank – Surrounded By Dark Clouds
Vidrum / 23 Feb 2012
In CY2011 the scrip tanked by almost 65 per cent on the bourses. However, in 2012 on a YTD basis the scrip is up by around 34 per cent. The rise of the stock should not surprise investors as with the interest rate soon expected to reverse the banking stocks have performed well in 2012. Some of its peers like Karnataka Bank is up by 56 per cent, Development Credit Bank is up by 45 per cent, etc. Even though the scrip has recovered some of its losses our advice to investors would be to stay away from the counter as we feel that the health of the bank does not seem to be good.
On February 7, 2012, Amitabh Chaturvedi, who was the managing director and CEO of the bank, tendered his resignation. According to media reports, there were differences of opinion with the other board members of the bank on issues related to business strategies. In December one of its directors, Vidyadhara Rao, also resigned from the bank. This indicates that there is something not clear in the minds of the management of the bank which could further affect its growth.
One should also note that of the 16 private banks and 24 public sector banks which we have studied, it was only Dhanlaxmi Bank which posted a loss in the December quarter of 2011. It posted a net loss of Rs 36.87 crore against profit of Rs 7 crore in the previous quarter last year. This is because the total expenditure of the bank increased by 61 per cent to Rs 427 crore. As on December 31, 2011, the capital adequacy ratio (CAR) of the bank came in at a mere 9.88 per cent, which is down by 351 basis points on a YoY basis.
Usually in a high interest rate regime the deposits of a bank increase but in this case it witnessed customers pulling out their deposits. This has been so each time the bank has been in the news for negative reasons. The third quarter results show that the deposits of the bank de-grew by 2.7 per cent to Rs 13,406 crore on a sequential basis.
With net loss in its book and very low CAR, Fitch International has further downgraded the bank’s rating to BBB- from the earlier BBB. The rating agency believes that going ahead the bank may see further losses which could arise from structural weakness. The downgrade may further raise the cost of borrowing for the bank and there could be a possibility of its customers pulling out some of their deposits.
In October 2011 the AIBOC had raised allegations against Dhanlaxmi Bank. According to AIBOC, the bank had manipulated its accounts and provisioning norms. It also stated that the bank had maintained poor capital adequacy ratio, had mismatched their assets and liabilities and has been more dependent on call money borrowings. However, on the next day the management arranged a press conference and denied all the allegations, terming them baseless. The bank is well regulated by the RBI and the management said that the growth is monitored periodically.
We believe one should avoid the counter as of now since the bank is losing its creditability and reputation which is one of the key parameters in the banking space. It has reported dismal third quarter numbers, the Fitch downgrade may further impact the performance and the new management will at least take some time to come out of all this and post a better show.
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